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 Rate Cut by the Fed - What's in it for you?

The latest reduction in a key interest rate by the Federal Reserve was partially meant to encourage banks to ease up tight restrictions on financing for all sorts of personal and business loans.

Moreover, it could help reduce interest rates tied to the London interbank offered rate, the benchmark known as Libor used for many adjustable-rate mortgages and commercial real estate loans.

The downturn in the housing industry and the growing numbers of foreclosures and credit delinquencies have some financial powerhouses cutting back on lending.  The Fed move also was directed at relaying a message that the Fed is ready to jump when needed.  Lastly, the move also probably aided consumer confidence with the Fed portraying the economy as stable and not heading into recession.

"If there's more access to more money at cheaper rates, that will pass through the broader economy and the banks' extension of credit to the public," said Richard DeKaser, chief economist for National City Bank.

Since September, the Fed has lowered interest rates by a full percentage point and is expected to reduce them another point in January.

What about my mortgage?  There is a huge amount of misiperception among borrowers that if the Fed reduces the rate 1/4 a point, my mortgages will go down," says Dan Dowling, president of United Mortgage Capital Corp, in Altamonte Springs, Fla. however, borrowers who may benefit from the cut are those with loans tied to the prime rate.  It's hard to say if rates will fall further because most fixed mortgage rates typically follow the 10-year Treasury note's yield and that has not budged much.

Home Equity Lines of Credit:   Consumers currently utilizing their line of credit will see savings within the next month or so.  Those inquiring about a new loan should see lower rates depending on the area in which they live.

Credit Cards: Many consumers using a credit card with variable rates(approximately 85%) may see a change as well.  But this will only affect those whose current rate exceeds the bottom-rate established by the issuer.  This is usually around 14%-15%.  But you might not get a lower rate for one to three billing cycles, depending on when and how often your bank resets rates.  "U.S. consumers owe about %800 billion in credit card debt, and a drop of half a percentage point in interest represents about $4 billion in savings for a years interest", says Robert McKinley, CEO of website CardTrak, which tracks credit card statistics and trends.

Car Loans:  Because many consumers use banks or credit unions when purchasing a used car, the Fed's cut may make it easier for them to meet their financing needs.

Savings Rates:  Yields on money market funds always follow the Fed funds rate and should fall half a percentage point in the coming weeks.  Rates on bank CDs may fall less, because banks are now very eager to attract your deposits and may offer you a premium rate.

SUMMARY

There seems to be more good points than bad in the recent action.  We all benefit as consumers if inflation is held in check and the Federal Reserve remains a potent force in the economy.  The rate drop was not meant to counter the credit crunch but to advertise a stable economic situation that will ultimately reduce the fears in the mortgage mess.